Revamping the EV Tax Credit
Electric vehicles are ready to take the world by storm. Car brands around the world are creating new additional EV models, and several brands, including Ford and Volvo, have pledged to convert entirely to electric in the future. Countries have simultaneously implemented generous incentives to consumers, manufacturers, and service providers to accelerate the growth of EV adoption, and in some countries, particularly Norway, EVs represent an increasingly larger share of new vehicle sales.
As one of the world’s top GHG polluters and superpowers, it is essential that the United States becomes a leader in EV adoption, which will support the growth of the global EV industry and help stabilize the planetary climate. That is why the House’s narrow passage of the Build Back Better reconciliation bill earlier this month was so important to climate activists and EV supporters. One interesting item of note within the bill is the expanded EV tax credit, which has the potential to advance the country’s EV sector to the next level.
What is the EV tax credit?
The original EV tax credit was created during the Great Recession recovery under President Obama, providing support to a nascent, yet promising industry that planned to revolutionize our transportation sector. Initially established by the Energy Improvement and Extension Act of 2008, the EV tax credit was further amended by the American Recovery and Reinvestment Act of 2009, increasing the tax credit up to $7,500 to US purchasers of qualifying EVs. The tax credit is still available to new EV buyers, who are able to claim its full amount (depending on how much taxes they owe) until a manufacturer sells more than 200,000 EVs. At that point, the tax credit is phased out and eventually goes away entirely.
The EV tax credit has been an important policy tool for the US government in encouraging EV adoption. The high purchase price of EVs has been one of the main barriers inhibiting EV uptake, so the tax credit helps reduce the financial burden by lowering the EV buyer’s tax liability. Unfortunately, the tax credit is not refundable nor transferable, which limits its effectiveness. More on its effectiveness will be discussed later.
While other countries have implemented many different incentives for potential EV buyers, the EV tax credit has been the main financial incentive provided to US consumers, with most federal government support given to manufacturers and service providers. States also provide a host of financial incentives and convenience measures to consumers to encourage EV uptake, such as California’s Clean Vehicle Rebate Project.
Most EV manufacturers still qualify for the federal EV tax credit, with only GM and Tesla no longer qualifying due to their market success. Over the past decade, the tax credit has been claimed by hundreds of thousands of EV drivers in the country, which has cost the government billions of dollars.
How does the BBB plan change the EV tax credit?
The Build Back Better reconciliation bill that was approved by the House significantly changes, and, in my opinion, strengthens the EV tax credit, although the Senate may make changes of its own. You can find an older version of the bill here. The main changes that stood out to me are:
- The tax credit maximum amount is increased to $12,500
- The tax credit is now refundable
- The tax credit is now transferable
- The vehicle cap is eliminated
Other important details include:
- To qualify for the full tax credit amount, the vehicle and battery must be built in the US, with the vehicle built by union labor
- The incentive applies to vans, SUVs, and light-duty trucks under $80,000, but there is a $55,000 price cap on all other cars
- In 2027, only US-made vehicles can qualify for the total tax credit, including the $7,500 base amount
- The incentive will end by 2031
While the base $7,500 tax credit amount remains, the incentive will increase an additional $4,500 for new EVs manufactured in the US using union labor. An additional $500 amount is added if the battery for the vehicle has at least 50% of components made in the US. Although only the Chevy Bolt and Bolt EUV currently qualify for the full $12,500 amount, EV manufacturers could change their production process and produce their EVs in the US to qualify for the higher tax credit incentive.
In addition to increasing the tax credit amount, the bill makes it refundable, which more closely resembles a point of sale incentive. This means that if someone owes $10,000 in taxes and qualifies for the full $12,500 incentive amount, instead of EV buyers only having their tax obligation reduced, they would also receive a payment for the remaining tax credit amount. Consumers knowing that they are able to benefit from the full tax credit amount might more seriously consider purchasing an EV.
Another improvement is that the tax credit is transferable, meaning EV car dealers can claim the credit on EV buyers’ behalf and reduce the sticker price of the vehicles. This feature can help overcome consumers’ concerns about high EV purchase prices which they have to pay upfront or via a loan.
Lastly, by eliminating the cap on qualifying vehicles per manufacturer, GM and Tesla vehicles can both qualify for the incentive. Considering these brands’ success suggests their EVs are more popular and trusted by consumers, eliminating the vehicle cap might further increase EV adoption.
What is next for the EV tax credit?
Before discussing how the tax credit can be improved, it is important to note the obstacles against the new tax credit’s fulfillment. Firstly, the BBB reconciliation bill must pass if there is to be a new tax credit, and based on current sentiments within the Senate, it seems unlikely Senate Democrats will have a majority of members on their side. Sen. Joe Manchin (D-WV) and Sen. Kirsten Sinema (D-AZ), probably the most powerful senators at the moment, have expressed concerns about the reconciliation bill numerous times.
Secondly, even if the reconciliation bill passes, Senate Democrats may decide to alter the tax credit, which could have major impacts on consumers and manufacturers. Sen. Manchin, who has a major Toyota plant in his state, has stated his opposition to the proposed tax credit’s US and union labor requirements, and the Senate has already begun considering revisions as seen here.
In my opinion, it may be unfortunate that the new tax credit is tied to such a divisive piece of legislation. While I wholeheartedly support the reconciliation bill, I acknowledge that it may not pass due to the large price tag and the types of programs and initiatives within the bill. I hope someone has considered passing the higher EV tax credit separately in case the reconciliation bill fails because its impacts could bolster the country’s domestic EV industry and greatly reduce our transportation emissions.
While not banning EVs produced in other countries, the proposed tax credit favors EVs built by American labor and incentivizes manufacturers to increase domestic production, which will create many long-term jobs. Allowing the tax credit to be refundable and transferable increases the attractiveness of EVs because consumers know they will benefit from the full amount and can have the credit applied at the point of sale (via reduced sticker prices) or when paying taxes (via reduced taxes and/or government payment). With the vehicle cap removed, the pool of qualifying vehicles will increase, which can only benefit consumers.
Unfortunately, politicians may be blinded by their disagreements with the larger package, and reject a proposal that will benefit our economy and the planet’s climate. Hopefully, there are supporters in Congress that will fight to ensure this strengthened tax credit is realized either in the reconciliation bill or in separate legislation.
How could the new EV tax credit be improved?
If implemented, the new EV tax credit will cost a lot of money, with estimates around $30 billion over the next decade. To put this into greater perspective, if just 1 million vehicles qualify for the full incentive amount, that will cost $12.5 billion, and estimates project there will be over 20 million EVs in the US by 2030. If the US plans to commit so much money to this policy, it must ensure the policy is designed and implemented effectively.
Studies of EV financial incentives suggest ways to improve their cost-effectiveness. Focusing on rebates, a study in China and a similar study in the United States, conclude that the cost-effectiveness of the financial incentives can be greatly improved by eliminating incentives for higher-income consumers and increasing the incentives lower-income consumers receive. Higher-income consumers, who represent most early adopters of EVs, have mostly purchased expensive EVs and did not really need the incentive in the first place. Lower-income consumers, who are more price-sensitive, respond more strongly to financial incentives.
By making the proposed tax credit refundable and transferable, Congress has transformed it into something that resembles both a traditional tax credit and a rebate, so the previous studies’ conclusions should still apply. Firstly, I would suggest the credit be turned into a rebate anyways as these have been demonstrated to have a greater influence in increasing EV adoption. Secondly, while the tax credit has vehicle price caps, these could be reduced over time as the market continues to develop and new EV prices fall. Thirdly, the income cap for the EV tax credit should also be reduced, as it is currently set at an outrageously high $250,000 for a single person. Fourthly, the tax credit amount should also be tied to EV buyers’ incomes, with lower-income buyers receiving a greater amount.
Through these improvements, policymakers could ensure greater EV adoption for less money. If Democrats make these changes and communicate the benefits, they may gain support from fiscally conservative Republicans, keeping alive the possibility the new EV tax credit is realized via the reconciliation bill or in separate legislation.
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